June 3 (Bloomberg) -- OTP Bank Nyrt., Hungary’s largest
lender, used unfair exchange-rate margins in a foreign-currency
mortgage loan, the country’s highest court said in a ruling that
may impact $15 billion in such contracts.

The court replaced the bid and ask rates used by OTP in the
calculation of the principal and the monthly repayments on a
Swiss-franc mortgage, Judge Ursula Vezekenyi said today in
Budapest. The lender will need to apply the central bank’s mid-rate and return the difference to the borrower, she said. The
court will meet June 16 to issue precedent rulings on the loans.
It earlier rejected scrapping the loans altogether.

Foreign-currency loans, which became ubiquitous in Hungary
last decade as borrowers sought lower interest rates, led to
soaring repayments and defaults as the forint plunged during the
global financial crisis. Prime Minister Viktor Orban, re-elected
to another four-year term in April, has pledged to phase out the
loans after the court decisions.

OTP Reaction

“There is no precedent law in Hungary, so verdicts in
specific cases don’t apply automatically to other verdicts,”
OTP said in an e-mailed statement, adding that it accepts the
ruling. The bank said the difference to be repaid as a result of
the judgment was less than 1 percent of the loan’s value.

An unfavorable court decision today may cost the banking
industry about 50 billion forint ($224 million), Akos Kuti, a
Budapest-based analyst at Equilor Befektetesi Zrt., said by
phone yesterday. A future ruling on unilateral changes to
interest rates may be a “potentially explosive issue,” Phoenix
Kalen, a London-based strategist at Societe Generale SA, said in
an e-mail today.

Outstanding Rulings

Outstanding rulings still to be delivered by the court
include exchange-rate margins and unilateral changes to loan
interest rates by lenders, which in effect will be precedent
verdicts as they will be binding on lower courts, Judge Wellmann
said.

Justices will also discuss June 16 whether household
foreign-currency loans are unfair because the exchange-rate risk
is born solely by the borrower and if they can be voided as a
result. Finally, they will examine whether unclear information
provided by the lender on the exchange-rate risk can render
contract clauses unfair and the entire loan void.

Foreign-currency mortgages and home-equity loans were at
$15 billion at the end of March, making up 64 percent of
mortgage-related loans, according to a Bloomberg calculation
based on central bank data.

Punishing Banks

Orban’s government has sought to make banks bear
responsibility for the spread of foreign-currency loans, which
have contributed to a decline in lending and sapped consumer
spending, deepening Hungary’s economic slump.

The government has imposed Europe’s highest bank levy and
in 2011 forced lenders to swallow $1.7 billion in losses on the
early repayment of some mortgages at below-market exchange
rates. The cabinet also set up a program allowing to temporarily
fix the exchange rates used for installments.

The government has said any intervention should avoid
making foreign-currency benefit over forint borrowers. The
measures also shouldn’t threaten banking stability, Economy
Minister Mihaly Varga said on public radio today.

Any retroactive change to contract terms must “take into
account the interests of both parties as much as possible,” the
Constitutional Court ruled on March 17.